FASB won’t require management to make going-concern assessments

FASB will not require management to assess whether there is
substantial doubt about an entity’s ability to continue as a going concern.

After its board meeting Thursday, FASB announced
that a majority of board members determined that such a requirement
would be difficult to apply. Board members decided that users of
financial statements would benefit more from ongoing disclosures about
risks and uncertainties.

Disclosures made only after management concludes there is
substantial doubt about an entity’s ability to continue as a going
concern would be less beneficial to users of financial statements,
according to the board.

The next step in the project is developing a principle for an entity
to determine the adequacy of its disclosures about risks and
uncertainties, and to evaluate how the content of those disclosures
could be improved. The board directed the FASB staff to develop such a principle.

FASB first issued a Proposed Statement of Financial Accounting
Standards, Going
Concern, on Oct. 9, 2008, for a 60-day comment period. The
proposal would have required an entity to assess its ability to
continue as a going concern, preparing financial statements on a
going-concern basis unless liquidating or ceasing operations was the
entity’s intention or only realistic alternative.

Management would have been required to take into account all
available information about the future, which was defined as at least,
but not limited to, 12 months from the end of the reporting period.

The proposal would have required management to disclose
uncertainties that cast substantial doubt upon the entity’s ability to
continue as a going concern.

FASB’s summary of the comment letters indicated that a large
majority of the 29 respondents generally supported FASB’s initial
decision to include guidance on going-concern assessments in
accounting literature. But respondents also had concerns. According to
FASB’s Comment
Letter Summary, a few respondents said the wording “all
available information about the future” was too broad and could
require management to consider an endless amount of information
“regardless of its quality or relevance.”

A few respondents questioned how much time and money management
should devote to considering all available information about the
future. A few observed that the purpose of a going-concern assessment
is to address the viability of an entity over the next 12 months, not
assess the viability of a business model in general.

Currently, AICPA Statement on Auditing Standards (SAS) no. 59,
The Auditor’s Consideration of an Entity’s Ability to Continue
as a Going Concern (AICPA, Professional Standards,
vol. 1, AU sec. 341), provides the U.S. guidance on this topic. It
states that the auditor is responsible for evaluating whether there is
substantial doubt about the entity’s ability to continue as a going
concern for a reasonable period not more than one year beyond the date
of the financial statements’ being audited. Information obtained
during a financial statement audit is the basis for this evaluation.

In October 2011, the board decided that improving disclosures to
serve as an early warning of an entity’s potential inability to
continue as a going concern would not be an objective of the project,
which was renamed Disclosures about Risks and Uncertainties and
the Liquidation Basis of Accounting. That decision was partly a
result of the board’s recent decision to add incremental disclosures
about liquidity risk in the separate project on accounting for
financial instruments, according to FASB’s report from the board meeting.

That left the board to decide whether management or outside
accountants of an entity should have the primary responsibility for
performing the going-concern assessment.

Another objective of the project was how and when an entity should
apply the liquidation basis of accounting.

FASB has previously decided in the project that an entity should
prepare financial statements on the going-concern basis unless a plan
of liquidation has been approved by the owners or is being imposed
by other forces and it appears remote that the entity will become a
going concern in the future.

Liquidation basis financial statements, FASB decided, should reflect
relevant information about the value of an entity’s resources and
obligations in liquidation. They should consist of a statement of net
assets in liquidation, and a statement of changes in net assets in liquidation.